chapter 5 - CHAPTER 5: EFFICIENCY AND EQUITY Scarce...

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CHAPTER 5: EFFICIENCY AND EQUITY Scarce resources might be allocated by Market price Command Majority rule Contest First-come, first-served Sharing equally Lottery Personal characteristics Force How does each method work? When a market allocates a scarce resource, the people who get the resource are those who are willing to pay the market price. Most of the scarce resources that you supply get allocated by market price. You sell your labour services in a market, and you buy most of what you consume in markets. For most goods and services, the market turns out to do a good job. Command Command system allocates resources by the order (command) of someone in authority. For example, if you have a job, most likely someone tells you what to do. Your labour time is allocated to specific tasks by command. A command system works well in organizations with clear lines of authority but badly in an entire economy. 1
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Majority Rule Majority rule allocates resources in the way the majority of voters choose. Societies use majority rule for some of their biggest decisions. For example, tax rates that allocate resources between private and public use and tax dollars between competing uses such as defense and health care. Majority rule works well when the decision affects lots of people and self-interest must be suppressed to use resources efficiently. Contest A contest allocates resources to a winner (or group of winners). The most obvious contests are sporting events but they occur in other arenas: For example, The Oscars are a type of contest. Contest works well when the efforts of the “players” are hard to monitor and reward directly. First-Come, First-Served
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chapter 5 - CHAPTER 5: EFFICIENCY AND EQUITY Scarce...

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